A New Deal in Asia

A truck driver walks past a shipping container being moved at the Yangshan Deep Water Port, part of China (Shanghai) Pilot Free Trade Zone’s Yangshan free trade port area, in Shanghai, China, on Wednesday, Oct. 23, 2013. The area is a testing ground for free-market policies that Premier Li Keqiang has signaled he may later implement more broadly in the world’s second-largest economy. Photographer: Tomohiro Ohsumi/Bloomberg via Getty Images

Can RCEP Pick Up Where the TPP Left Off?

By Shiro Armstrong

Since the end of World War II, the foundation of Asia’s prosperity, economic integration, and political stability has been the U.S.-led liberal order. That order took a hit on January 23, when President Donald Trump withdrew the United States from the Trans-Pacific Partnership (TPP), a 12-nation free trade agreement covering the Asia-Pacific region.

Leaders of the 11 remaining TPP member states are scrambling to save the agreement, which has been in negotiation for nine years, and on which they have expended significant political capital. The TPP was negotiated as a hub-and-spokes deal, connecting a number of smaller economies to the central hub of the United States. Without U.S. participation, most of the other countries will have relatively little incentive to continue. Japanese Prime Minister Shinzo Abe admitted as much after the U.S. election, saying that a “TPP without the United States is meaningless.”

Ministers of TPP members met in Chile on March 14–15 to attempt to craft a post-U.S. TPP strategy, but appear to have made no progress beyond reiterating the importance of the agreement and strengthening the rules-based international trading system. Yet the reality is that the TPP is dead, and it is futile to hope for a revival. The priority in Asia should now be to find other ways to keep markets open and strengthen the liberal order. For a start, Japan and the United States could attempt to salvage something from the TPP’s wreckage through a bilateral trade agreement. Together, Japan and the United States accounted for 79 percent of TPP countries’ total GDP, and such an agreement would also reinforce their military alliance. Abe’s February meeting with Trump laid the groundwork for future negotiations along these lines, with the United States pushing for a bilateral deal while Japan attempted to stall, holding out hope for an eventual resuscitation of the TPP.

Yet a U.S.–Japanese agreement, however beneficial, would do little to secure trade openness in Asia more broadly. Doing so would require commitments to open markets from other major economic powers, such as China, India, and Indonesia. Currently, there is nothing stopping Asian TPP countries from taking good policies from the agreement, such as the market-access commitments on trade, investment, and services, and implementing them unilaterally. But without the guarantee of reciprocity, such actions would likely be politically unpopular. A more practical solution would be for ex-TPP countries to pursue plurilateral trade deals (or deals involving several participants) with one another. For example, the TPP’s proposed rules on e-commerce, which secure cross-border data movement and storage, made progress in setting new international standards. The TPP also included sensible provisions on anti-corruption and regulatory transparency. Even without the full agreement, countries could sign plurilateral deals enacting these standards and then have them ratified within the WTO. The deals could be left open for other countries to sign onto at a later time.

PICKING UP THE PIECES

The most promising opportunity to strengthen Asia’s rules-based economic order, however, may well be the East Asian Regional Comprehensive Economic Partnership (RCEP), a free-trade agreement currently under negotiation among Australia, China, India, Japan, New Zealand, South Korea, and the ten members of the Association of South East Asian Nations (ASEAN).

Like the TPP, RCEP covers market access (in goods, investment, and services), rules, and trade facilitation. Yet RCEP differs from the TPP in being built around a cooperation agenda, in which the developed countries are expected to help the less developed ones through capacity building and the harmonization of standards, rules, and regulations. Of course, without a dominant country such as the United States to lead the negotiations and exert leverage, it may be that RCEP’s commitments will end up being less ambitious. But TPP has set some sensible benchmarks.

Shipping containers are stacked at the Yangshan Deep Water Port in Shanghai, China, on Friday, May 11, 2012. The leaders of China, Japan and South Korea agreed to start negotiations this year on a free-trade accord between three of Asia’s four biggest economies. Photographer: Nelson Ching/Bloomberg via Getty Images

Thanks to Beijing’s economic weight in the region and its political influence among the partnership’s other countries, RCEP has often been described, including by former U.S. President Barack Obama, as a China-led agreement. Yet as with other East Asian efforts at regional cooperation, such as the ASEAN Plus Three (China, Japan, and South Korea) dialogues on economic institution building, the real driver behind RCEP is not China but ASEAN. The proposed agreement is built on already existing free trade agreements between ASEAN and the six other RCEP parties, and negotiations were formally launched in 2012 at the ASEAN Summit in Cambodia. The structure of negotiations, for instance, means that China cannot dominate, or even show leadership except by way of example. Indonesia, where RCEP’s guiding principles were crafted, is the chair of the lead negotiating committee, and every alternate negotiating round is held in an ASEAN country. Driven to unity and cooperation in dealing with its large neighbors, ASEAN favors slow, consensus-driven cooperation. Rivalry and political mistrust among Asia’s major powers—China, India, and Japan—have made ASEAN the lynchpin of regional dealmaking.

In addition to its economic benefits, the 16-country RCEP is an opportunity to salve the sometimes fractious political relations among the Asian powers. Just as the TPP provided cover for Japan to do a deal with the United States, RCEP provides cover to for improved Chinese-Japanese and Chinese-Indian economic relations, where political sensitivities might make negotiating bilateral deals too difficult. There is a further opportunity to enmesh China and other rising economies in a rule-based system that would not only further regional economic integration, but would also be an Asian contribution to keeping the global trading system open. This would reinforce geopolitical stability in the western Pacific while reiterating a commitment to global openness.

SECURING THE ASIAN ORDER

RCEP provides a natural opportunity for building an Asian coalition in defense of free trade and economic cooperation, and one that could potentially incorporate certain aspects of the TPP, such as the latter’s rules on e-commerce and investor protections. Not all of the rules and standards in TPP can or should be incorporated into RCEP, however. The TPP’s rules on strengthened intellectual property rights, and on higher labor and environmental standards, for example, reflected the expectations of an advanced economy and had largely been imposed by the United States. RCEP members such as China, India, and the developing economies of Southeast Asia may aspire to U.S. standards on labor and the environment, but they cannot meet them immediately or leapfrog into advanced stages of development.

With the demise of the TPP, it is important that RCEP secure commitments from countries that bind them to achieving higher standards, stronger rules, and more transparency over time. To be credible and deliver real reforms, there will have to be ambitious commitments to opening markets from day one of the agreement. And the deal will need to address difficult topics, such as state-owned enterprise rules for China, Malaysia, and Vietnam. Importantly, RCEP will need to be a living agreement that is able to evolve to meet new challenges over time.

This will not be easy, and all the sticking points are well known. Japan has not yet shown a willingness to open its agriculture and services markets to Asia, at least not to the extent it promised to open them to the United States in the TPP. China needs to commit to reforms that bring credibility to Xi Jingping’s January defense of globalization at Davos. India, despite pushing for the opening of service markets elsewhere, is still inclined to keep its own markets protected. On this count, Prime Minister Narendra Modi will have to demonstrate that he is different from his predecessors.

This year marks the 50th anniversary of the formation of ASEAN, which could provide negotiations with a sense of urgency. The core of a credible RCEP can be completed in 2017, with the landing zones for the rest of the agreement cleared for completion in 2018. But doing so would require political leadership in countries that have so far shown little evidence of it. But this is no ordinary time in the global economic system. The rise of protectionism and nationalism around the world is driving home the point that business as usual for Asia will no longer suffice.